Rethinking Greece: Giorgos Argitis on the effects of internal devaluation and the need for an alternative economic policy

Giorgos Argitis is Associate Professor of Macroeconomics at the University of Athens and scientific director of the Labour Institute of the Greek General Cofederation of Greek Workers (INE-GSEE). His research interests are Post Keynesian-Minskian macroeconomic/monetary theory and policy and Old-institutionalist/evolutionary theory. He has published four books about the Greek economy and is the author/co-author of academic papers that have appeared in theJournal of Post Keynesian Economics,Cambridge Journal of Economics, Review of Political Economy,Contributions to Political Economy, and theEuropean Journal of Economics and Economic Policies.

INE-GSEE's research attention is paid to the macroeconomic behavior of the Greek economy; the developments in non-standard employment and its implications for labour law and for social security coverage and trade union organizing; the sustainability of the pension system; the challenges of the economic crisis to social policy in Greece; and the way that welfare and labour market institutions impact on economic growth. The INE-GSEE monitors and analyses these changes and make publications on fiscal economic and employment issues that are geared to proposals for action but also of a more academic type.

Professor Argitis is the co-author - together with Nasos Koratzanis and Christos Pierros - of the “The Greek crisis: outlook and an alternative economic policy” chapter - published in March 2017 - of the “2017 independent Annual Growth Survey: The Elusive Recovery” (iAGS)*. The Greek crisis chapter is an evaluation of economic conditions in Greece so far, presenting the main pillars of an alternative policy proposal that has been elaborated by INE-GSEE.

Giorgos Argitis spoke to Rethinking Greece** about the findings of the report regarging the effects of the creditors’ policy agenda of fiscal austerity and internal devaluation on the financial stability of the Greek private sector,on the Greek labour market as well as on poverty and living conditions in Greece.

According to Argitis, the very architecture of the macroeconomic adjustment programmes implemented in Greece since 2010 is incompatible with the country’s consumption-demand led growth model. Thus, any attempt to address Greece’s sovereign debt crisis and inadequate competitiveness by means of a frontloaded mix of fiscal discipline and internal devaluation is destined to fail and to aggravate the country’s financial instability. In view of that, any real prospect for Greece to escape the crisis depends on the sustainability of its economic growth, a proposal for which rests on three pillars: (a) a new financing architecture in line with the principle ‘sustainable primary surplus – sustainable debt’, (b) an investment-led productive transformation of the Greek economy and (c) stimulating employment by the immediate abolition of the measures taken in the direction of greater labour market flexibility:

How do you evaluate the results of the memoranda applied in Greece since 2010?

Seven years after the outbreak of the sovereign debt crisis, the Greek economy continues to be stuck in a debt trap with the near-term fiscal outlook remaining gloomy and uncertain. The main reason for this is twofold: a) creditors’ overemphasis on fiscal austerity that has proven incapable of restoring the country’s solvency, credibility and creditworthiness; and b) the imposition of a pro-cyclical fiscal tightening amid deflationary conditions that has caused negative growth effects, further raising the country’s credit risk. Against this backdrop, the trajectory of the Greek economy over the coming years will primarily depend on its growth performance and thereby its ability to generate a primary budget surplus to service its debt payments.

Since 2010 Greece has engaged in an extremely ambitious fiscal consolidation plan. The government budget deficit has declined from 15.1% of GDP in 2009 to 1.1% in 2016, while in structural terms, the improvement of the fiscal balance in the period 2010-2016 has reached 13.6 percentage points, the largest seen across the EU. This extraordinary fiscal consolidation performance over the past years has been greatly facilitated by the package of harsh austerity measures embarked upon by the Greek authorities since 2010 in the context of the three Memoranda of Understanding (MoU).

This staggering fiscal adjustment had a tremendous negative effect in social services provision, public investment and employment, and furthermore, it has not been successful in reducing the gross debt-to-GDP ratio. More specifically, the ratio has reached a peak over the adjustment period, increasing from around 126.7% in 2009 to 179.7% in 2016, despite the large debt ‘haircut’ agreed in early 2012. According to the latest estimates, the debt burden is set to remain essentially stable in 2017, breaching 177% of GDP. This is a fairly disappointing track record, given creditors’ initial anticipations on the allegedly expansionary results of fiscal consolidation. The fact that the ratio of public debt-to-GDP has remained for too long at unacceptable record high levels poses a direct challenge to the very credibility of the macroeconomic adjustment programmes.

Why do you think fiscal austerity has not managed to improve Greece’s financial credibility?

The main drivers behind the over-indebtedness of the Greek public sector have been the massive bailout loans granted to the country to avoid default and the recessionary effects of the fiscal adjustment programmes implemented thereafter. A closer look at the major factors that have influenced the trajectory of the public debt-to-GDP ratio over the past few years helps explain Greece’s negative debt profile. During the first phase of macroeconomic adjustment (2010-2013) the austerity-led contraction of real GDP along with extraordinary high interest payments and sizeable primary budget deficits have set the tone for the serious debt overhang episode in the country and the ensuing solvency crisis. The year 2014 has been a turning point in the process with the achievement of a positive primary balance especially in 2016 that has yet been insufficient to arrest debt dynamics. In addition the sustainability of these primary surpluses is uncertain in a country that has not yet returned to growth.

All in all, austerity has not succeeded in consolidating sound and sustainable fiscal conditions in Greece and helping public authorities regain access to private bond markets. What it has succeeded in doing instead is to have plunged the Greek economy into a disastrous spiral of debt-deflation and recession that consistently constrains the country’s debt servicing capacity and prolongs excessive macroeconomic and financial instability.

At the epicenter of the creditor’s strategy lies internal devaluation. Has this strategy yielded results?

The ingredients of the creditors’ remedy have proven profoundly mistaken. The major reason for this is that this strategy has failed to consider the Greek economy’s heavy reliance on domestic demand. Labour cost restraint and increased labour market flexibility have failed to spur investment and competitiveness: it has deepened the weakness of the Greek economy and greatly contributed to the declining performance of virtually all branches of economic activity. Specifically, in the period between the fourth quarter of 2010 and the fourth quarter of 2016 all key branches, other than real estate activities and agriculture, forestry and fisheries, have witnessed a pronounced drop in real gross value added. The steepest fall has occurred in construction (35.6%) followed by professional, scientific and technical activities (31%) and information and communication (26.7%).

On top of that, internal devaluation has proven incapable of propping up Greece’s export performance. Greece’s exports of goods and services have on average expanded at a particularly modest rate between 2012 and 2016, hardly outstripping 2.3% per year, despite the strong growth of the country’s tourism industry from 2013 on. The most prominent contributor to the correction of the country’s persistent current account deficits has been the dramatic decline in imports, mainly due to shrinking domestic demand. This sensitivity of Greece’s trade balance to the movements of domestic demand underlines the country’s productive deficiencies and highlights the critical role of public investment as a tool for fostering both macroeconomic stability and structural competitiveness.

Apart from aggravating the economy’s productive problems, internal devaluation and fiscal austerity have also put intense pressures on the financial balance of the private sector, thus feeding back economic stagnation and solvency risk. The creditors’ agenda has also corroded private households’ financial health. The plunge of household savings lies at the heart of the mal-performance of austerity in Greece because it has starkly degraded the financial position of households, preventing any real prospect for a vigorous recovery of consumer spending in the near future. On top of that, it has exposed the Greek banking system to a greater credit risk by undermining the loan portfolio quality.

Could you talk to us about the changes in labour laws that have been requested by the creditors?

Since 2010 industrial relations in Greece have been in the eye of the storm of the crisis, being an integral part of the internal devaluation strategy, via a combination of reducing minimum wage, de-collectivizing wage bargaining and lowering labour costs. So far, a range of regressive labour market reforms has been promoted through active state intervention geared towards promoting flexible and precarious forms of employment and reforming collective bargaining. Such measures inter alia include: the suspension of all branch and occupational collective agreements’ extension as long as Greece’s economic adjustment programme is in full effect; the suspension of the so-called ‘favourability principle’ in collective bargaining; and the prevalence of company level agreements in the case of overlapping with the relevant branch level collective agreement.

Also, far-reaching interventions have been undertaken in the content and universality of the general national collective agreement, including a 22% reduction by decree in the national nominal minimum wage and a further 10% cut for employees aged less than 25 years old; the enactment of legislation providing exclusive competence to the government, rather than to social partners, to set the minimum wage level; the removal of the ‘universal applicability principle’ of the general national collective agreement on wages.

On top of that, from 2012 on, recourse to arbitration is permitted only by the unanimous consent of all parties concerned and arbitrators’ decisions are strictly limited only to issues related to the determination of the basic wage. It is obvious that these deregulation measures undertaken over the last years have radically modified the balance of sociopolitical power towards employers, narrowing dramatically the range of choices and the bargaining power of trade unions.

How has the aforementioned deregulation of the labour law influenced the Greek labour market?

Creditors’ internal devaluation strategy has caused detrimental effects on the labour market. From the fourth quarter of 2008 until the fourth quarter of 2016, unemployment in Greece has recorded an unaccepted surge, climbing from 8% to 23.1% of total labour force.

What is even more upsetting is that the scourge of high unemployment has mostly ravaged the more vulnerable groups within society. Youth unemployment rate has hit a record high during the years of austerity, ascending by over 30 percentage points. Despite the gradual drop in youth unemployment recorded recently, young people in the country find it very difficult to take up a job. Furthermore, the female unemployment rate constantly surpasses the nation-wide average, standing at 27.6%. At the same time, the risk of unemployment threatens all, no matter what their educational level—even those who hold a postgraduate degree. This evidence substantiates the importance of demand-led economic policies for combating both cyclical and structural unemployment.

What about the effect of labour law deregulation on income and living standards?

Unfortunately, the dismantlement of collective bargaining institutions and wage suppression have obstructed the path towards any socially inclusive economic restructuring of Greece. Along with drastic cutbacks in social welfare spending, they have led to an unparalleled deterioration in living conditions, widening the development and income gap separating the country and the rest of its EU partners. In particular, real GDP per capita in Greece has dropped by 24.5% in the period 2008-2016, standing today at nearly 17 thousand euros. This evidencecorresponds to only 63.3% of the average per capita real income in the EU-28, indicating a disturbing process of divergence between Greece and the EU in terms of living standards.

Furthermore, austerity has exerted a severe impact upon living conditions in Greece, leading to a dramatic upsurge of anchored poverty. It is also important to note that, together with the striking increase in poverty, over the last six years, an ever growing part of the population in Greece suffers also from material deprivation.

It is worthy to note that the austerity agenda has impinged disproportionally upon the living conditions of unemployed persons. Specifically, for this population group severe material deprivation has risen from 20.2% in 2009 to 43.4% in 2015, meaning that more than 4 out of 10 jobless people do not have the means to meet at least four key requirements for decent life.

How can we rethink an exit from the crisis, after 7 years of memoranda?

The INE-GSEE has elaborated a policy proposal built upon three pillars: an alternative debt crisis management framework; interventions for stimulating domestic demand and re-regulating the labour market. We propose a new financing architecture in line with the principle ‘sustainable primary surplus – sustainable debt’. At a first stage, what is needed is a new financing architecture that would set the annual interest payments at least equal to a lower, pre-specified sustainable primary surplus target. In this context, debt-restructuring does not necessarily imply a ‘haircut’, but a new repayment schedule and much lower average interest rates.

Taking into account that the Greek economy is a consumption-led growth economy, an investment-led productive transformation of the Greek economy is also essential. In fact, empirical evidence indicates that stimulating productivity by means of increasing investment spending by 9% per annum over the period 2010-2017 would have produced the same competiveness gains in terms of real effective exchange rate as the ones caused by cutting wages, without the recessionary effect of the latter option.

This project for stimulating domestic demand should be designed so as to provide support to selected sectors and activities that have strong multiplicative effects on actual and potential output and in which Greece possesses significant comparative advantages, such as: (a) agriculture and food industry; (b) high-quality and sustainable tourism activities; (c) sustainable energy networks and green power infrastructure; (d) high and medium-high technology manufacturing sectors (e.g. refined petroleum products, manufacture of chemicals and chemical products).

Nonetheless, given Greece’s consumption-led growth model, reviving real investment activity has to run in parallel with stimulating employment. In this respect, we propose the design and activation of a ‘Job Guarantee Programme’ (JGP) in Greece.

However, to expand employment and economic growth in Greece, the immediate abolition of the measures taken in the direction of greater labour market flexibility is imperative, along with the adoption of a new, socially inclusive agenda for reshaping the labour market. In this context, a range of policy interventions that could serve this goal includes the full restoration of collective bargaining system and the unconditional application of all collective bargaining agreements.

According to the iAGS for 2017 published on December 2016, titled “Elusive Recovery”, Europe needs more and better employment and a lower dispersion of income as well financing redistributive welfare states via the taxation of high wealth, high incomes and inheritances in order to promote economic growth and increase social stability. However, while a growth-oriented economic policy is necessary it is not sufficient to obtain social progress and individual well-being. Policy makers need to move beyond the predominant, narrow focus on GDP growth, and aim instead at a broader set of economic, social and environmental targets.